Good, Bad and Ugly — Faces of Tomorrow’s Economy
This post is an outcome of the talk I gave on Future X conference at Imperial College London in 2019 “Fintech’s revolution against global inequalities” and will focus on highlighting the brief overview on selected global trends of financial inequality distribution.
I like to think that understanding a wider context of a problem is key in finding the right solution. The economy is a complex and decentralized system and its boundaries are hard to define as they blend in every area of our life and governing structures of our countries and businesses. If we will try to explore it by looking from distance on aggregated numbers we can discover some interesting trends but without deep dive to numbers behind the individual, it can be sometimes misleading.
Let's gives now little attention to financial inequalities. We need to build some reference points first, and this will help us to understand and explore extreme poverty. World Bank defined extreme poverty line as 1.90 $ per day ( 2011 PPP ) and they have set a goal to reduce the number of people living in such condition to below 3% by 2030*. This is a bold goal but it may be in our reach. On another hand 1.90$ a day is a very low number and it is both scary that is a life-changing amount for so many people in the world. When we are looking at data that World Bank provide, we can see we did amazing improvement in recent 30 years reducing extreme poverty share from over 35% to below 10% of the global population.
That is a huge improvement. This is a very strong trend and gives us a lot of optimism, but to learn more we need to decompose it deeper. Are we doing better in some areas and others not so well? What are the drivers for this change?
Looking at extreme poverty regionally we see there are areas like South Asia or East Asia and Pacific that have a significant improvement in reduction of a problem with a prediction that in next 5 to 10 years they will be able to marginalise this type of poverty. But not every part of the world is performing so well. We see a very different trend in Sub-Saharan Africa were local conflicts and forced or necessary migrations kept people locked down with very limited possessions and opportunities to change their situation. They struggle with food, drink not mentioning education, hygiene, place to sleep or medication. The trend here is not only not decreasing but increasing and this should be a strong signal to the international community that we should explore opportunities to support those people if necessary.
On the other hand the success of Asia and the Pacific is directly correlated with the dynamic economic growth and importance of India and China. More opportunities for people and rising middle class have an impact on the economic situation of the general population of those countries and the strength of their global economical position. It also is reflected in changing the expectations and opportunities for people in those countries and transforming family model. Without a culture change or religion transformation, people will more likely adopt western behaviours and have fewer kids in favour of career, travel and other opportunities.
Book Factfulness by Hans Rosling is introducing a different point of view on wealth distribution. If we would divide people into 4 income groups we can have a more meaningful picture on distributions of wealth and needs of the population in those groups. Level 1 are people who earn up to 2$ a day so it relates to people living in extreme poverty by World Bank definition. People in Level 2 will have an income between 2 and 8 dollars a day. Their needs and opportunities will differ from Level 1 challenges but their life will still be hard. Level 3 are people earning 8$ to 32$ and above that will be Level 4. Most of the people reading this article will be in Level 4. That separation helps us to understand what life challenges are reflecting the size of the population.
It is even more interesting when we will try to map those levels Levels to participation in the market on a timeline. We can imagine how significant transition is from Level 1 to Level 2, from Level 2 to 3 is, how many more people can live in better conditions than it was possible years ago. The opportunities and wealth were never before so good. But it is also worth noticing that growth of contribution of Level 4 is slowest.
This visualisation of income level distribution in time gives us a little bit of hope but also raises other questions. How wealth distributes around the population. It is known that above some income level there is no direct relation to happiness and wellbeing and when for Levels 1,2,3 income is increasing we could observe life-transforming improvements for Level for, especially most wealthy of them, more money does not translate to significant changes in life.
Let's take a deeper look on top of the income pyramid. It is estimated that the Richest 1% are on the target to own 2/3 of all wealth by 2030. The disproportion between the richest ones to all the rest is growing very fast. Capital in capitalism have much bigger power than work and regarding improvements across the general population, inequalities in this area are increasing making the richest even richer.
One of the most important tools we have to address this issue is not working as it should. Pointed by historian Rutger Bergman in Davos during World Economic Forum 2019 we should put much more emphasis on taxes for rich. Surprisingly many of them are able to avoid taxes or even pay less than members of the working middle class. A small example of this is that 1,470 households in US reported income of more than $1 million in 2009 but paid zero federal income taxes on it or 30 percent of income inequality is due to unfair taxes and budget cuts to services and benefits.
Taxes are the main instrument to redistribute wealth and provide benefits for all citizens. They are maybe not perfect, but it might be the best instrument we have for now. There are two types of challenges for tax system: how to make it more efficient ( potentially transparent ) and how to get more money at the input to make most out of it. Richest, who can make the biggest difference, is often not feeling responsible for all the others or is difficult for them to share what they owe.
Final Thought
There is a lot what we still can do to make World a better place. The wealth that is a big contributor to our daily opportunities, education and health needs more attention. The democratisation of education and investment opportunities can help to address inequalities. We need to make the system we live in better or evolve it to a new one. I am optimistic that there is an intention to make it happen, and I am looking forward to changes to come.
